Q
– Our oldest child is just graduating from grade six, and we’d like to
start saving for post-secondary education. We’ve seen some brochures from
companies that offer Registered Education Savings Plans, but they seem
somewhat complicated, with our funds pooled with other investors. And we’re
not even sure we need it. Do you have any suggestions? – Paul and Lorraine T., Peterborough, Ontario

A
– It’s May, and there’s only another month of school left for most high
school and elementary students. For these students, post-secondary
education is only a few years away. And like you, many parents are worried
that they won’t be able to afford to send their kids to university. And
unless they start planning now, they could be right.

How much does a university education cost?

The hard reality is that post-secondary education is an expensive
proposition. Yes, the real cost of tuition is heavily subsidized by
governments. But the amount students have to pay is still considerable.
According to Statistics Canada, students graduating in 2016 paid an average
of $6,100 per year tuition, with undergraduates in Ontario paying the
highest, at an average $7,800. Add residence expenses of at least another
$8,000 per year, and you’re up to $15,000 at the top end. Oh, let’s not
forget books, snacks, clothing, laundry, transportation, phones, and so on
for at least another $2,500 to $3,000 per year.

So how much does that four-year university education end up costing? At a
minimum, would you believe $72,000? And that’s in Canada. And for a
standard four-year university program – not a professional degree, like
medicine, law, or dentistry, which is even more. Undergraduate students in
dentistry ($18,934) paid the highest average tuition fees in 2015-16. They
were followed by students in medicine ($13,416), pharmacy ($11,723) and law
($10,983). These four programs recorded some of the highest percentage
tuition fee increases: dentistry (+4.5%), pharmacy (+4.0%), law (+4.0%) and
medicine (+3.3%).

Thinking about aiming for an exalted American Ivy League spot? Try $63,000
for a single year! With inflation and rising costs, those amounts
will just keep on growing.

How do you possibly save that much?

So those proud parents with a grade-schooler or a high-school teen with
aspirations to higher education have a lot on their plate. Luckily, there’s
a tax-efficient way to save for that. It’s called the Registered Education
Savings Plan (RESP). The key is that the sooner you start, the better off
you’ll be.

Basically, the RESP lets you invest money for your child’s through a
special plan in which the investments grow tax-free for as long as they’re
in the plan. In addition, the government kicks in Canada Education Savings
Grant (CESG) of 20% of contributions to the RESP, to an annual limit of
$500 for a lifetime maximum of $7,200. The grant is enhanced for lower
income families.

The extra tax benefit of an RESP comes later. When the funds are withdrawn
for educational purposes, the money is taxed in the hands of your child,
who will likely be in a zero tax bracket. So again, no tax will be payable.

The magic of compound growth

Not only can you contribute as much as you want every year, up to a total
maximum limit of $50,000 per child, but remember that the government kicks
that a grant of up $500 per year based on your contributions. The whole
thing can add up to a nice little tuition nest-egg. At a steady return of
6% on, say, a mutual fund investment of $200 per month for 18 years yields
a total over $78,000, of which only $43,000 is direct contributions, well
below the $50,000 RESP maximum limit. Increase the size of contributions or
the investment yield, and the nest-egg grows even bigger.

RESPs come in many different versions offered by various sponsoring
organizations. There are individual and family plans. You can also start up
a self-directed RESP. To be sure you’re getting the features you want and
to integrate your RESP strategy into your overall financial plan, your best
bet is to check with your financial advisor before signing on the dotted
line. – Robyn

The foregoing is for general information purposes only and is the opinion
of the writer. Securities mentioned are illustrative only and carry risk of
loss. No guarantee of investment performance is made or implied. It is not
intended to provide specific personalized advice including, without
limitation, investment, financial, legal, accounting or tax advice. Please
contact the author to discuss your particular circumstances.